Adjustments, debt and privatisations: what will become of our rights?

Susana Chu Yep; Jorge Acosta Arias; Patricio Pazmiño Freire
Centro de Derechos Económicos y Sociales (CDES)

The sale of state companies required by the IMF, the scaling down of the State through mass dismissal of workers, reduction in government spending, the elimination of subsidies to basic services and fuel, cutbacks in wages and salaries, the protection of international creditors through FEIREP and the intensification of the extractive model of overexploiting resources—these are characteristics of the public policy implemented by the national government, following the guidelines of international bodies.Anunprecedented economic and financial crisis

In1999, Ecuador suffered an unprecedented economic and financial crisis that ledto a 7% drop in real GDP, a 200% devaluation of the Sucre (the nationalcurrency), a moratorium on the foreign debt, and an increase in poverty to 70%of the population. Official protection of corrupt bankers, freezing of bankaccounts, and the implementation of “dollarisation” (adopting the dollar ascurrency) led to an indigenousuprising, followed on 21 January 2002, by the removal from office of PresidentJamil Mahuad and installation of his Vice-President, Gustavo Noboa.

TheInternational Monetary Fund’s “support” of the “new” Ecuadoriangovernment resulted in the imposition of new structural adjustment measures inthe negotiation of the Tenth Letter of Intent. The IMF also posed as a mediatorand surety before the international creditors in the renegotiation of theprivate foreign debt, through the exchange of Brady Bonds for Global Bonds,valued at USD 5 billion and agreed upon at interest rates of 12% and 10% (up tothree times higher than the Libor rate in force on the international market).This renegotiation has not led to a drop in the heavy debt burden on theState’s General Budget (Presupuesto General del Estado or PGE), as payment ofpublic foreign and domestic debt service[1]represents over 35% of the PGE, vis-à-vis 19% assigned to fulfilling Stateobligations regarding economic and social rights (education, health, generationof employment and support to production).

Althoughdollarisation has led to a certain economic stability following the 1999 crisis,this has not generated a substantial improvement of the Ecuadorian economy, buta serious weakening of the country’s productive and social structure. Theadoption of the dollar as currency is causing non-traditional export productsand even those aimed at the domestic market (which are very vulnerable toimports from neighbouring countries that have suffered devaluation) to losecompetitiveness. This problem becomes more serious as the interest rate forloans[2]remains high in a dollarised economy.

Thiscan be observed in the considerable growth of imports and in the contraction ofexports, contributing toward a trade deficit of USD 600 million during the firsthalf of 2002, estimated to rise to USD 1.6 billion by the end of the year. Thisfigure represents approximately 8% of the estimated GDP for 2003.


Source:Monthly Bulletins of the Ecuadorian Central Bank

Thepossibility of solving this recession in the productive apparatus depends on animprovement in competitiveness, which would have three components: an increasein productivity (hard to achieve without considerable investment in technology,not forthcoming in the short-term), a drop in internal production costs(particularly labour and tax costs), and particularly important, governmentsupport to these sectors (which, in the present context of free trade discourse,seems hard to achieve).

Socialimpact and perverse priorities

Withinthis economic context, 40% of the Economically Active Population (EAP) isunder-employed, and almost one million Ecuadorians, or 8% of the population,have migrated, most to Spain, Italy and the United States.[3]

Furthermore,there is a consumer gap among families, because the average monthly salary in2002 – USD 140 – is not enough to cover half the cost of the basic familybasket, priced in August 2001, at USD 330.


Source:National Statistics and Census Institute (INEC)

Since45% of fiscal income within the PGE depends on the sale of oil and itsby-products, the State has proposed to increase oil exploitation substantiallyusing private capital, through the construction of the Pipeline for Heavy CrudeOil (Oleoducto de Crudos Pesados - OCP), calling for bids for new oil fields inthe Ecuadorian Amazon and the extension of contracts with current oil companies.

Inthis context, the IMF required promulgation of the Organic Law for FiscalResponsibility, Stabilisation and Transparency (4 June 2002). This lawestablishes a limit of 3.5% in real terms of Public Expenditure growth, exceptfor the payment of public debt, and considers the creation of a Stabilisation,Social and Productive Investment and Reduction of Public Indebtedness Fund(Fondo de Estabilización, Inversión Social y Productiva y Reducción delEndeudamiento Público - FEIREP) with tax income generated by OCP as from 2004.These resources will be allocated as follows: 70% to buy back the public debtand to pay the debt with the Ecuadorian Social Security Institute (InstitutoEcuatoriano de Seguridad Social - IESS), 20% to stabilise oil income and 10% forinvestment in health and education. This clearly shows that the priority ofgovernment policies in the use of public funds and natural resources is to paythe debt over social investment.

Furthermore,tax policies are not aimed at creating an equitable system. The weight of valueadded tax (VAT), an indirect and regressive tax, has increased over the pastyears, from 1.4% of the GDP in 1983/84 to 8% in 2001, representing over 25% ofthe State’s total income and 51% of the total non-oil income in 2002. Incometax, which is a direct and progressive tax, grew little during the same periodand represented 3.2% of the GDP in 2001, equal to 20% of non-oil income and 11%of total income.

Consideringthat 70% of the population is in a situation of poverty, these figures show atax system that favours the richer classes and is detrimental to the majority ofthe population.

Adjustingup to strangulation?

Basedon the instability of international oil prices, the restriction in monetarypolicy imposed by dollarisation, and the tax surplus required by the IMF, theState has justified the sale or concession of public companies (electricity andtelecommunications) to generate alternative sources of government income inaddition to oil by reducing government spending, increasing oil prices, cuttingor freezing wages and reducing the operating costs of ministries. They hope thusto sustain the national budget.

However,this course has a very narrow intention: the government must generate othersources of income to cover the budget and generate a surplus, because oil incomeis pledged and will be used to pay the debt.

Privatisationof public companies in Ecuador has met with problems: the opposition of tradeunions and social organisations and the public perception of corruption and lackof transparency in these processes.

Inan attempt to carry out a public auction of the electric companies in April2002—despite an intensive campaign to convince the people of the advantages ofprivatisation, the arrival of fresh capital and the benefits of “free”competition—the government was unable to achieve the sale. Despite efforts toimplement laws for greater flexibility of the labour market (prohibition of theright to join trade unions, work by the hour, mass dismissals, sub-contracting,etc.), public rates for basic services (Table 1) were increased. Debt wastransferred from companies that could be privatised to the Ecuadorian State (asin the case of the electric companies, where the State took on a debt of USD 300million to “increase” market value). The State changed laws to ensurecontrol of the company by foreign capital (sale of 75% of the public company’sshares instead of 51%).

Tofacilitate the privatisation process, the State was obliged to give“guarantees” to the companies, ensuring profitability through theauthorisation to raise the rates of basic services, allowing the establishmentof private monopolies, providing tax exemptions (particularly of VAT and taxeson imports of machinery and equipment), relaxing environmental regulations andgranting permission for the companies to repatriate unlimited amounts ofprofits.

Therecurring argument of the State that it is necessary for public companies to beefficient and competitive has led to a substantial increase in the rates forbasic services over the past years, in an attempt to make them more appealingfor sale. Water, gas and electricity rates have increased by 40% per year overthe past three years, causing a consequent escalation in prices of goods andservices,[4]resulting in very high rates of inflation: 61% in 1999, 97% in 2000 and 23% in2001. Increasingly fewer Ecuadorians are able to have access to these basicservices and to the products of the basic family basket, showing a cleardeterioration in the population’s quality of life.

Table 1 - Increase in theprice of basic services (energy, gas and water)

December 1999


December 2000


December 2001


June 2002


Source:Monthly Bulletins of the Ecuadorian Central Bank

TheLetter of Intent being discussed with the IMF will seriously fetter the newpresident, who is to take office in January 2003. Under the premise ofgovernment discipline and adjustment of accounts, the out-going government hascommitted itself to having a primary surplus[5]by 2003 of 6.9% of the 2003 GDP (approximately USD 1.4 billion). This means thatthe new government will have to “save” 23% of the State’s total budget,cutting back on social and productive investment, increasing the rates of basicsocial services (electricity, water, telephone), and selling public companies.These “savings”, according to the law adopted for Government Transparency,will serve to guarantee payment of the foreign debt. By decision of the IMF,negotiations with the out-going government have been suspended and will becontinued with the newly elected President.

However,while the business community is pressing for a cutback in production costs, andmore assistance and incentives for the exportation of their products and theimportation of raw material, most of the population is trapped by an unceasingdollarised inflation and a lack of employment that is obliging more and moreEcuadorians to leave the country.

Theprivatisation process, the shrinking of the State through dismissal of workers,and the sale of state companies required by the IMF, together with mandatedcutbacks in government expenditure, the elimination of subsidies to basicservices and fuel, the reduction of wages and salaries, the protection ofinternational creditors through FEIREP and the intensification of the extractivemodel of over-exploitation of resources—these are characteristics of thepublic policy implemented by the national government under the guidelines ofinternational organisations like the IMF.

Thismodel, favouring macroeconomic variables, violates systematically and withimpunity the economic, social, cultural, and environmental rights of millions ofEcuadorians to a decent life, health, education, a healthy environment and fairand dignified employment. These rights are protected by the PoliticalConstitution of the Republic and by international conventions and agreementsthat the government of Ecuador and international organisations are obliged toconsider, protect, respect and fulfil.


[1] Debt service in the budget is approximately USD 2 billion in 2002.

[2] The active rate of interest fluctuates between 15% and 20%.

[3] According to the Migrations Office, 504,203 Ecuadorians left the country between 1999 and 2000. Paradoxically, these migrants generate the second item in the country’s income, by sending monthly remittals amounting to approximately USD 1.4 billion in 2001 and are the true pillars of dollarisation.

[4] The items of water, energy and gas represent 11.1% of the Consumer Price Index (CPI); however, they represent 17.3% of the Producer Price Index (PPI).

[5] The primary surplus corresponds to the total government expenditure, minus interest on public debt.